Fed official: Recovery will require a fine hand

KANSAS CITY, Mo. —The nation can't wait for certainty before taking its next difficult steps toward a strong economy, one policymaker directing those efforts said Thursday in Kansas City.

Tom Hoenig, president of the Federal Reserve Bank of Kansas City, said government will have to begin withdrawing its substantial support for the economy even while doubts about the recovery remain.

"There will be, understandably, a very strong view that we wait until we are absolutely certain the economy's back in full force," Hoenig said during his annual outlook address at the Central Exchange. "I understand that."

Unemployment is at 10 percent nationally, higher in many areas and industries. State budgets in California, New York and other states are buckling or forcing sizable cutbacks in services and benefits.

Withdrawing government support too soon could choke off recovery, but Hoenig said that is not the only risk. He said acting too late could also weaken the recovery and boost inflationary pressures.

Policymakers, however, will have to make their call before all evidence of the recovery is in hand.

"In every recovery there is uncertainty at the early part of the recovery," he said. "You can't always be for sure. There's always mixed data."

Hoenig said the coming decisions to change policy will have to rely on the preponderance of economic data.

He likes what he sees.

"We are in the early stages of a recovery," Hoenig said. "We have reasons to be optimistic."

He also said that his own outlook is for stronger growth than most estimates of 2.5 to 3 percent.

Hoenig credited federal spending programs and actions by the Federal Reserve for moving the economy from recession to recent growth.

He also cited the "self-correcting" nature of the economy, such as growing exports as the global economy improves and greater domestic activity as businesses rebuild inventories.

But, Hoenig said, at some point government faces the "delicate decision" to begin withdrawing its support for the economy both from monetary policy at the Fed and fiscal policy choices in Congress and the White House.

As president of the Kansas City Fed, Hoenig is a member of the Federal Reserve policy committee that will make some of those decisions.

Fed presidents also serve as voting members one year in every three, with Hoenig casting votes this year along with Fed governors appointed by the president and Chairman Ben Bernanke.

Hoenig spoke extemporaneously to his luncheon audience, but in his prepared remarks he went further in defining the risks of waiting too late to act.

Jobs are at stake, not just the more frequently heard concerns about inflation.

"Experience, both in the U.S. and internationally, tells us that maintaining large amounts of stimulus over an extended period risks creating conditions that lead to financial excess, economic volatility and even higher unemployment at some point in the future," his written remarks said.